What do the recent changes to the UK Pensions Lifetime Allowance (LTA) mean for you? 

In March 2023, the Chancellor announced that the lifetime allowance (LTA) for pensions would be abolished. This came into effect on 6 April 2024. Before then, the LTA was the total amount that an individual could accumulate in UK registered pension schemes and relevant overseas pension schemes without incurring certain tax charges. Given the extensive press coverage of the changes to the LTA, we wanted to provide some clarity and explain what this means for you, as it directly impacts retirement planning and tax liabilities. 

What has changed?

The LTA was established to set an upper limit on pension savings that could be accrued over an individual’s lifetime while still benefitting from full tax benefits. In some cases, it was possible to increase the LTA through various protections. Following the recent changes, however, the LTA has now been replaced by a combination of two new vehicles: lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA). Knowing the new caps and rules ensures investors can maximise tax-free benefits and avoid unexpected tax charges. Additionally, being aware of the transitional rules and protections still available until April 2025 helps you to protect your retirement savings under the new regime.  

What is new?

The two new allowances that came into effect on 6 April 2024 are crucial for determining the maximum size of tax-free lump sums that can be taken from a pension. Specifically, the LSA caps the amount that can be taken tax-free during your lifetime in the form of either a pension commencement lump sum or the tax-free element of an uncrystallised lump sum, whereas the LSDBA caps the tax-free lump sums that can be paid to beneficiaries after your death (if this occurs prior to age 75). The standard LSA and LSDBA are £268,275 and £1,073,100, respectively. These values were chosen to broadly replicate the tax-free amounts that were available to most individuals under the previous LTA regime. 

Additional protections

Two additional forms of protection, which mitigate the constantly changing thresholds set by the government, are still available and can be claimed until 5 April 2025. These protections are similar to those introduced whenever the government previously reduced the Lifetime Allowance. They are not available to everyone and can in some cases have a negative effect on overall tax efficiency.  

What does this mean for me?

These changes might affect: 

• individuals who receive lump sum payments or death benefits, 
• individuals with applications for LTA protections, lump sum protections or LTA enhancements, and 
• individuals of relieved non-UK and registered pensions schemes transferring to a Qualifying Recognised Overseas Pension Scheme. 

Under these new rules, it may be that some individuals are able to resume pension contributions they had previously suspended due to maximising the old LTA tax regime. For those retiring now who have not yet taken any retirement benefits, it is crucial to seek advice to ensure they are utilising the most tax-efficient strategies.  

At Citywide, we are committed to keeping you informed about the evolving regulations and their implications on your financial planning. All our advisers are up to date on these matters and more. If you would like to discuss how this affects you in more detail, we are always here to help.